Salt Lake City, Utah
The “Crossroads of the West” Boasts Enduring Strength at the Core
by Carole VanSickle Ellis
With a housing market holding strong in both single-family and multifamily sectors, an unemployment rate under half the national average in the last quarter of 2020, and an emerging trend in interstate “near-shoring” as West Coast businesses move operations inland to avoid high taxes and stringent health policy restrictions, the Salt Lake City real estate market is a shoo-in for “most likely to succeed” in 2021. However, as every real estate investor knows, the hottest markets do not always represent the best opportunities for investors who tend to operate on the age-old maxim of “buy low and sell high”. In Salt Lake City, as in many markets around the country, real estate investors must leverage market insights, creative deal structuring, and innovative strategies to continue to acquire and optimize assets in this thriving market.
A Study in Resilience
“The coronavirus economic shutdown sent home sales tumbling in April and May [of 2020], but the downturn appears to be short lived,” the Salt Lake Board of Realtors said in a late-October press release on the local housing market. The group reported buyers were taking advantage of record-low mortgage interest rates in order to move into the suburbs, and predicted the spring buying season would easily extend into summer and fall. Median home prices rose dramatically, up 10 percent year-over-year in Q3 2020 compared to Q3 2019. With housing affordability reaching all-time lows, that median home price is six times higher than the average Salt Lake City household is earning. Even with low interest rates, many residents are on the lookout for better living options that will enable them to remain in the metro area and take advantage of the booming jobs market.
One local resident who recently relocated to the SLC metro area from Ontario, California, told a local newspaper there were 26 job openings in her specialty as an account manager when she began looking at making a move. However, with other areas of the country posting nearly 14 percent unemployment and the national rate hovering just over 9 percent (compared to Utah’s 4.1-4.5 percent unemployment rates in Fall of 2020), that individual was not alone in applying for jobs or once accepted, looking for somewhere to live. The housing inventory and home prices reflect that.
“We are going to struggle to do deals because of a lack of inventory,” warned Mike Ostermiller, CEO of the Northern Wasatch Association of Realtors. The Wasatch Range of mountains runs south of the Salt Lake City metro area and is a highly desirable place to live for people remote working or who plan on commuting into the city when their employers reopen office spaces. Ostermiller added that Utah and SLC had experienced nearly five years of rising home prices prior to the COVID-19 pandemic, which an increasing number of economists are describing as a trend “accelerant” driving residents out of metropolitan areas and into suburban and rural settings.
James Wood, a senior fellow at the University of Utah’s Kem C. Gardner Policy Institute, recently predicted Utah [and, by extension, Salt Lake City] would likely continue to see a “serious housing shortage” even as residents begin to experience housing instability because of long-term unemployment in certain economic sectors. New construction of single-family homes, condominiums, and apartments fell in 2020 due to COVID-related restrictions, thereby exacerbating the pre-existing 50,000-home shortage.
Tracing the Near-Shoring Trend
For real estate investors hoping to take advantage of Salt Lake City’s strong economy and jobs market by providing homes for sale or rent in the highly competitive market, the key to acquiring properties and making the most of every potential lead is definitely in the details. With a diverse economy, relatively strong success in containing COVID spread during the Thanksgiving holidays (the final verdict on Christmas is still out), and public schools that remain largely open, Salt Lake City is looking better and better to the newly mobile U.S. population. The existing local population is attractive to employers as well; SLC boasts the youngest median age talent pool in the country and a host of recession-resistant industries.
“Utah is ranked the most diverse economy in America,” explained Colliers International-Utah chairman Brandon Fugal. “While most markets are certain to be impacted by the pandemic, Utah’s financial, technological, and health and wellness sectors should actually gather strength.” There is plenty of evidence to back Fugal’s predictions. Amazon, Facebook, and Tyson’s Foods are already expanding into the market, even pre-leasing office space in some cases. Other tech companies are following suit, snatching up industrial/flex space as fast as industrial developers can make it available.
According to Adam Long, who serves as COO and director of special products for Colliers International-Utah, the strength of the local market stems mainly from an economic shift that occurred in Salt Lake City and the surrounding area in the early 2000s. “High tech, real estate, wellness, and manufacturing are eclipsing the previous economic drivers from 20 years ago…mining and agriculture, as the most prominent forces of expansion,” he said.
Investors should track movement into Utah and into Salt Lake City and its surrounding suburbs by companies previously based in other states and by international corporations. Wherever commercial development attracts these entities, opportunities for residential development and residential real estate returns will soon follow. For example, in September 2020, Salt Lake City forged ahead with plans to open The New SLC, the city’s $4 billion international airport and, in the midst of the pandemic-induced recession, Salt Lake City posted the largest single-phase office transaction in state history.
Long observed, “Even during COVID-19…Blackstone invested $4.7 billion to acquire Ancestry.com and SunRun acquired Vivint Solar for $3.2 billion…. There is a mutual understanding that Utah will come out of this stronger than before.” Ancestry.com is based just 25 minutes south of Salt Lake City, while Vivint Solar is headquartered in SLC itself. These tech companies and many others make up the “Silicon Slopes” population in Utah and are playing a significant role in keeping the economy steady in SLC despite volatility in most other areas of the country. The Silicon Slopes have a history of attracting tech giants over the past 10 years, with Adobe, Oracle, Microsoft, Qualtrics, and Domo considered “homegrown” firms.
Salt Lake City and the state of Utah have dedicated a great deal of time and effort to making the area amenable to these tech corporations. SLC has long been considered a major transportation and logistics hub, thus earning its nickname, “The Crossroads of the West”. Local policy makers have also worked hard to establish SLC as being environmentally and tech-friendly, a key to attracting West Coast corporations and employees. A year prior to the pandemic, Forbes senior contributor on mortgages, housing, and real estate, Aly Yale, warned Salt Lake City was “sneaking up” on Silicon Valley. “Although affordable rents may play a role…there are other factors at work here as well,” Yale said.
Thanks to a vast array of “clean air policies” already on the SLC radar long before 2020 and the ongoing COVID-19 pandemic, attracting remote workers and companies that would permit their employees to work from home at least part-time has been part of Salt Lake City’s municipal goals for years. The Wasatch Front area already has sufficient broadband infrastructure to support indefinite remote work and remote schooling, although SLC has determinedly kept many local schools open. According to the SLC Sustainability Department, which was formed in 2016, and the SLC Department of Economic Development, “Salt Lake City is prioritizing a near-term transition to clean, renewable energy…through a variety of efforts including policy action, designing efficient buildings, sourcing renewable energy, installing solar on city buildings, implementing sustainable infrastructure, and shifting to alternative fuel fleets.” These types of policies make the move to SLC much easier for companies with clearly delineated environmental policy statements in corporate bylaws or contained within corporate culture.
Multifamily Residential Remains Firmly in the Mix
Most national media headlines about housing these days herald an “urban exodus” of multifamily renters into homeownership in suburbia. In many areas of the country, this assessment of the trend is fairly accurate, if a bit oversimplified. As stringent stay-at-home policies keep many urban residents confined indoors in small apartments with little or no access to private outdoor living spaces, the natural reaction is certainly to start looking for a single-family home with a nice yard. However, in Salt Lake City and the surrounding areas, the increasingly dire shortage of affordable housing, relatively few limits on outdoor recreation, and that compelling availability of well-paying jobs is making apartment living in SLC look appealing.
For investors, the idea of owning SLC rentals is also particularly appealing these days as public health policy and eviction policy intersect in previously unheard-of ways. Thanks to the U.S. Centers for Disease Control and Prevention (CDC)’s recommendations, many states have opted to suspend nearly all nonpayment-related rental evictions, making it difficult for rental owners to sustain these types of investments. In Salt Lake City, however, the rental market for single and multifamily units is holding strong.
As in most markets, local real estate experts and economists expressed worry over the strength of the SLC market earlier this year, but soon they began to sound optimistic. “The bottom line is that the market is healthy, that the rents are still increasing, that we’re still not building enough rental units, that evictions are lower than an average year, [and] more people are paying,” Paul Smith, executive director of the Utah Apartment Association, observed at the end of November 2020. He added, “2020 has been a very healthy year for rental operators.”
Although 2020 rent rates rose only about three percent compared to rising between 5 and 7 percent in 2018 and 2019, the market has held steady and rents have continued to come in. Smith credited distribution of CARES Act money and other stimulus funds for much of this consistency. “We really have not had many problems with people being able to pay rent,” he said. Although this could change in 2021 as stimulus programs are discontinued, Utah’s strong housing market and population of relatively affluent employees is likely to bolster the economy and rent payments from the highest tiers of income to far lower levels.
And, as Smith noted, there is plenty of room for investors interested in new construction, upgrading older facilities, or buying on the outer edges of the suburbs. As buyer preferences evolve with employer permissions for remote work, multifamily buildings with private or semi-private outdoor living spaces or with access to attractive outdoor recreation options will become increasingly attractive.
Salt Lake City, as an “18-hour city” with a burgeoning population and plenty of places to backpack, hike, ski, camp, river raft, or rock climb (just to name a few), is perfectly positioned to continue to bring in employers and high-earning employees to bolster its economy. “What’s attracting people and companies to [18-hour cities like SLC] is a good central core with lower costs of living and doing business,” wrote Urban Land Institute senior vice president for the ULI Center for Capital Markets and Real Estate, Anita Kramer, in the ULI and PwC’s “2021 Emerging Trends in Real Estate Report.” Salt Lake City stands out on the Emerging Trends top 10 list for “overall real estate prospects” in 2021 thanks to affordable living, a young and skilled population, and, as always, that sterling unemployment rate which is far below national average.
Sidebar 1:
3 Important Upgrades for Post-Pandemic Multifamily Living
It is no secret that the COVID-19 pandemic has changed the way the country lives, works, goes to school, and socializes. The changes are particularly stark (and often negative) for apartment dwellers. These households often opted to sacrifice pre-pandemic square footage for urban access and walkability. Now, restricted to their homes in some cities and even barred from community amenities in some cases, these individuals are on the hunt for better dwelling options. With single-family rental rates and purchase prices skyrocketing, apartment living may remain the only option.
According to LoopNet and the National Multifamily Housing Council, there are certain relatively simple amenities that stand out in the pandemic multifamily market. Here are three of them:
Reliable high-speed internet
Never before has reliable internet been so important no matter what income level your property serves. Remote school and remote work make access to the web a necessity.
CDC-compliant common areas
Although some states and cities are still prohibiting large gatherings, many permit individuals seeking a little solitude from remote work to find it in common areas–as long as they are able to appropriately distance from others and do not gather in large groups.
Pet-friendly amenities
2020 was tough on many market sectors, but the pet industry thrived. In 2020, U.S. pet owners spent an estimated $99 billion on their pets, up from $95.7 billion in 2019 according to the American Pet Products Association. Offering a pet-sitting service or a dog park for fluffy friends could add serious value in multifamily properties in 2021.
Sidebar 2:
Salt Lake City’s Outdoor Options are a Year-Round Attraction
2020 unexpectedly became the year of the “drivable destination” when COVID-19 locked down the country and most “traditional” family vacation destinations, like theme parks, this past March. As the pandemic dragged on, real estate markets within what is considered “drivable” distance to outdoor destinations like beaches, national parks, or ski resorts skyrocketed in value. That trend, predicted VRBO in its latest “Travel Trend Report,” is likely to continue into 2021 and beyond.
VRBO analysts evaluated vacation-planning trends and new “flexcation” trends, which involve extended stays in second homes, like beach houses, during which adults work remotely and children attend school remotely. These extended stays often convert vacation destinations into permanent residences if the household finances can tolerate the expense and the adults’ employers appear ready to embrace full-time or near-full-time remote work permanently. Cities like Salt Lake City, which serve as “basecamps” for outdoor enthusiasts year-round, are likely to benefit the most from ongoing pandemic-based travel.
“Some pandemic-era travel habits show no signs of slowing down, including road trips, visiting the great outdoors, and taking flexcations,” wrote VRBO researchers. They added, “59 percent of families say they are more likely to drive instead of fly” and “61 percent of families say they are more likely to visit an outdoorsy destination than an urban one.” With this in mind, Salt Lake City’s outdoor recreation options and proximity to multiple outdoor destinations makes the market look even better to potential residents.
Here is a cross-section of the options available outdoors to visitors and residents in Salt Lake City:
Acres of Parklands: 5 designated state/national parks within a day’s drive, including Arches, Canyonlands, Bryce, Zion, Capitol Reef, Great Salt Lake, Coral Pink Sand Dunes, Antelope Island, and Goblin Valley. Many of these parks double as dark-sky parks at night, making them ideal for
bringing the stars “up close” during the remote-astronomy lessons.
Hiking and Biking: Three nearby canyons (Ensign Peak, City Creek Canyon, and the Living Room) offer easily accessible hikes, while most of the area is bike-friendly. Off-road biking options abound as well. Since Salt Lake City is on the north/south migration route for a wide variety of birds, there is plenty of ornithological activity in the area as well. In fact, there are entire local festivals dedicated to the activity.
Skiing and Snow Sports: If you prefer your outdoor activities a little more freezing, then the local “Greatest Snow on Earth” at Ski City could be the slopes you’ve been waiting for. For the less adventurous, there are plenty of tube runs, ice skating rinks, snowmobiling parks, and snowshoeing trails.
Sidebar 3:
Utah & Salt Lake City National Rankings
#6
Utah ranks sixth in the nation for its knowledge economy and capacity for innovation (Milken
Institute State Technology and Science Index)
Top 10
Salt Lake City was named a Top 10 Metro for Entrepreneurship in 2020 by LinkedIn Economic Graphs.
Top 10
Salt Lake City ranks in the top 10 for “overall real estate prospects” in the Urban Land Institute and PwC’s 2021 Emerging Trends in Real Estate.
#3
Salt Lake County was the third-fastest growing county in the state this year.
#1
Salt Lake City was ranked first on the “Fiscally Fit Cities Report” from State Farm Insurance and Best Places in 2020.
#5
Salt Lake City ranked fifth in the Centrum “Healthiest Cities Study” in 2020.
#8
Salt Lake City ranked eighth for cities with fastest-rising income according to the most recent U.S. Census Bureau data.
3 – BEDROOM SINGLE-FAMILY RENTAL PRICES
The Salt Lake City, Utah MSA is the 74th largest metro by population with 1.23 million residents.
Current three-bedroom SFR rental prices average $1,635 for the MSA.
High-rent areas to the east of the city, South Jordan and Sandy areas have an average range between $1,700 to $2,000. The least expensive areas (white/light red) to the west of Salt Lake City and Taylorsville are moderately
lower, from $1,450 to $1,600. The remainder of the light red areas show rental prices are between $1,500 and $1,700.
5-YEAR RENTAL PRICE APPRECIATION
In the last five years, three-bedroom SFR average rental prices over the Salt Lake City MSA have increased a moderate 22.7%, ranking the metro 94th place for five-year rental price appreciation. Metro wide rent price appreciation cooled the past few years but has picked up again in 2020 with many areas in the market seeing 5% to 8% one-year price hikes.
Rental price increases have increased the most in the west side of SLC, as well as Sandy and West Jordan, with 20% to 30% five-year increases (dark green).
RENT-TO-INCOME
As of 2019 census data, the Salt Lake City MSA had a median household income of $80,200, ranking 27th highest amongst the largest 200 metro MSAs. Three-bedroom SFR rent-vs-income ratio in the MSA is a moderate 26.6%, well below the national average of 32%.
Working class familiesnear central Salt Lake City have lower household incomes between $40,000 to $50,000. The low incomes lead to some of the highest rent-vs-income ratios in the metro of over 40% (dark blue).
YIELDS
Median SFR home prices are currently $425,000, gaining 45% in the last five years.
Gross Rental Yields (GRY), excluding expenses, across the top 200 U.S. markets average 8.6%.
The weighted average GRY in the Salt Lake City MSA is one of the lowest yield areas in the country at only 5.2%.
Average gross rental yields in Salt Lake City, West Valley and Taylorsville are the highest for the market, but only reach 7% (dark purple). Expensive areas in the east and south of the market have much higher priced homes, equating to lower yields below 5%.
